Brother adopts IFRS, the International Financial Reporting Standards, from this fiscal year. The figures of FY2015, provided as a comparison with FY2016 figures, have also been changed in accordance with IFRS. Business segment profit in this document indicates a profit indicator similar to operating income in Japanese GAAP. We will disclose both business segment profit and operating profit as the indicators of profitability management. The first is the outline of Brotherʼs cumulative total results for the first half of FY2016. 1
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This is the outline of Brotherʼs cumulative total results for the first half of FY2016. Sales revenue decreased by 9% or 30 billion yen, to 310.3 billion yen on a yen basis. However, sales revenue, in real terms, increased by 2.5% if the negative impact of the yenʼs appreciation, which brought about a decrease of about 40 billion yen, was excluded. Business segment profit increased by 28% or 7.6 billion yen, to 34.7 billion yen. Although profits in the P&H business and the Machinery business decreased, profit in the P&S business, which was positioned as the business for profitability enhancement, showed a drastic twofold increase from the previous year. Both operating profit and net income in creased. Page 4 has a summary of respective business segmentsʼ figures. 3
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This is the main factors for changes in business segment profit for the consolidated cumulative second quarter. The profit increased by 7.6 billion yen compared to the same period last year. The breakdown of 5.3 billion yen in the difference in sales is as follows: An increase of 13 billion in the P&S business A decrease of 1.5 billion in the P&H business A decrease of 4 billion in the Machinery business A decrease of 2 billion in the N&C business The P&S business largely contributed to a cost reduction of 2.2 billion yen. In a decrease of 7.7 billion in the forex impact, P&S accounted for 80% thereof; P&H 10%, and; Machinery 10%. The breakdown by currency was a decrease of 6 billion yen due to a 15-yen appreciation of the yen against the euro, no impact by the exchange rates against the U.S. dollar, and a decrease of 1.5 billion yen by the impact of the exchange rates against the British pound and the RMB, etc. As for 4.8 billion in SG&A, P&S accounted for 50% thereof, and N&C and Machinery occupied the rest parts. R&D expenses as a whole decreased by 1.8 billion. The P&S business and the N&C business, both of which were positioned as the businesses for profitability enhancement, decreased their R&D expenses by 2 billion and by 500 million, respectively, while R&D expenses increased in growth businesses, including the Machinery business. This resulted in a total reduction of 1.8 billion in a whole company. Domino in this graph shows changes associated with the Domino business. It resulted in an increase of 1.7 billion because the expenses related to the acquisition of Dominoʼs shares, which were allocated last year, became no longer needed. 5
Next is the highlight of respective business segments. The first is the Printing & Solutions business. The sales revenue of communications & printing equipment increased by 3.4% on a local currency basis. Hardware accounted for 5%, and consumables 2%, respectively. Sales remained robust mainly in the U.S. and China. Unit sales of both mono and color laser Printers/All-in-Ones exceeded those of the same period last year. Although unit sales of inkjet All-in-Ones fell below those of the previous year, the shift to models with super high-yield ink tanks or models with high-yield ink cartridges improved the model mix. The sales of electronic stationery steadily increased. Business segment profit increased almost twice compared to that of the previous fiscal year. Sales in P&S rose by slightly more than 3%. Fixed cost reductions, improved efficiency in the use of sales promotion expenses and R&D cost reductions worked well for strengthening profitability, and profitability in emerging markets improved due to an increase in the sales of inkjet All-in-Ones with high-yield ink tanks. These positive factors contributed to an increase in profit. 6
Next is the Personal & Home business. Sales revenue fell by 3.7% on a local currency basis. Sales in Western Europe continued to increase while sales in the Americas, which had been drivers of the business growth, dropped. Despite no significant change in demand, sales in the Americas decreased due to no new model launch in our flagship middle to high-end products during the first half of FY2016. Operating profit resulted in a significant decrease of 80% despite no drastic decline in sales. This was first due to the negative impact of yenʼs appreciation, which brought about a decrease of 700 to 800 million yen. The unbalanced model mix was the main factor behind this decrease. The sales of high-end sewing machines costing more than ten thousand dollars increased strongly last year. In contrast, the sales of high-end products slowed down in this period because no notable new models were launched in the market. In addition, a buildup of inventories led to an increase in the elimination amount of unrealized gains on inventories, and thus profitability decreased. As shown above, the failure of achieving the sales target of high-end sewing machines in the Americas was a strong factor in deteriorating profitability. 7
Next is the Machinery business. The former M&S business and Industrial Part business were integrated into the Machinery business from FY2016. Sales fell by 18.9% on a local currency basis. In industrial sewing machines, sales slightly decreased by 3.8% mainly due to lower demand in China. Although sales in Asian countries, which succeeded to Chinaʼs position as a manufacturing site of apparel products, continued to grow, the sales target of the first half period failed to be achieved due to the economic slowdown. In machine tools, sales decreased by more than 30%. This was mainly because we did not receive big orders from IT-related customers unlike the same period last year. The sales of products for automobile-related market, where Brother placed importance, grew steadily, but they were not enough to offset the decrease in the IT-related sales. In industrial parts, sales remained steady. Operating profit decreased, mainly attributable to a decrease in the sales of machine tools. 8
In the Network & Contents business, sales revenue fell by 10%. In the online karaoke business, sales decreased because the sales of the new on-line karaoke systems launched last year had settled down. In the karaoke club business, sales increased steadily as a result of approaches to bolster profitability, such as the reorganization of unprofitable clubs and new store openings in prime locations near stations. Business segment profit increased due to cost reductions and enhanced profitability in in the karaoke club business. In accordance with the mid-term business strategy, Brother conducted structural reforms in its subsidiary XING. Operating profit was zero due to one-time expenses associated with the structural reforms. The structural reforms were expected to bring about over a one-billion reduction in fixed cost. We will continue to strengthen profitability with an aim of achieving a target of CS B2018, an operating profit ratio of 5% in FY2018. 9
Next is the Domino business. This is a comparison between the three month of FY2016 Q2 and those of FY2015 Q2 because the Domino business was consolidated from the second quarter of FY2015. Sales decreased by 14% due to the negative impact of the depreciation of the British pound. They remained almost flat on a constant currency basis. The reduced investment in hardware triggered by concerns over economic slowdown in emerging countries affected sales negatively although aftermarket sales, including consumables sales, rose by more than 5%. Profitability fell year-on-year, but it still remained at the level of our planning line. We have been carrying out investment aggressively in accordance with the five-year strategy until FY2020. Consequently, investment in R&D expenses and SG&A increased compared to those of last year. The depreciation of the British pound also brought about a decrease of several hundred million yen. Below are our comments on the inquiries about Brexit from some of the investors. Domino is a UK company having its main factories in the U.K., but its sales in the U.K. is extremely limited, accounting for only 8% of its total sales. In terms of cost, this weaker British pound can provide a boost to the Domino business. Therefore, we consider the impact of Brexit would have less impact on the Domino performance. Brotherʼs factories in China also have started the production of some of Domino products. Collaboration between Brother and Domino has already been working not only in development but also in production. 10
This is the summary of main achievements in the first half of FY2016. In the Printing & Solutions business, Brother launched inkjet All-in-Ones with highyield ink cartridges in the U.S. and Japan. In the U.S., we have been focusing on promoting these cartridges with the catchphrase INKvestment and also using nontraditional approaches, including the use of digital media. As for Brotherʼs flagship mono laser products, we globally brought out new models in almost every high-speed and high durability product category. White-colored products, in particular, doubled their durability compared to their previous models. We expect them to become flagship products to expand our sales in the SMB market. In the Machinery business, the new factory built within the Kariya Factory has started its operation. Unfortunately, the factory utilization rate is not high due to a decline in IT demand. However, it will serve as an important infrastructure to expand our business, contributing to improving the in-house production ratio of parts, reducing external warehouses, and expanding production space. In the Industrial Printing business, Brother launched a laser marker as its first product in this field. We will expand the scope of our industrial printing business while meeting customer needs, such as the enhanced traceability of parts. 11
Next is about the revised forecast. Unfortunately, we revised sales revenue downward by 10 billion yen, but adjusted profits up. As for sales revenue, we lowered the previous forecast in every business segment to reflect conditions in respective businesses and regions. Regarding profitability, business segment profit was revised up by 5 billion in the whole Brother Group. 12
Please see the data of the business profit segment on this page. The forecast for the P&S business was revised upward by 7.5 billion yen from our previous forecast of 34.5 billion yen to 42 billion yen. Although the sales forecast for the P&S business was slightly lowered, the profit forecast for it was raised up to reflect the positive effects of our approaches for enhancing profitability. The P&H business and the Machinery business each lowered their forecasts by 1 billion. In the P&H business, as mentioned in the performance section, the sales of highend models fell below expectations especially in the Americas and the model mix became unbalanced. The revised forecast reflects these negative factors. The forecast for the Machinery business was revised downward, reflecting the downwardly-revised forecasts for industrial sewing machines and industrial parts. 13
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